Supply Chain Management: The Perils of Going Global

To Tim Carroll, the difference between multinational and global is more than a question of semantics.

Carroll is vice president of worldwide operations for the Integrated Supply Chain function of IBM-surely one of the most "global" companies in existence. Or so one might think. But he prefers the term "multinational" for the way IBM did business up until about 10 years ago.

For most of its life, IBM has had operations in various parts of the world. Whether or not they were managed in a coherent, centralized fashion is another matter. Indeed, for the many companies that are now outsourcing their manufacturing and procurement to foreign locations, that's the crux of the issue. Having acted largely out of a desire to cut costs, they're now faced with the challenge of managing complex, global supply chains.

The general strategy seems to be: outsource first, figure out how to make it work later. According to Beth Enslow, senior vice president of research with the Boston, Mass.-based Aberdeen Group, international supply chains are far less automated than their domestic counterparts. Communicating across borders still involves massive amounts of paper, not to mention phone, fax and e-mail. Companies functioning in that way will find it nearly impossible to exchange accurate, critical data in anything approaching real time.

"For most companies, from an organizational structure, international logistics was its own separate group," Enslow says. "And international purchasing managers were lower on the totem pole than those on the domestic side." The latter received preference when it came to acquiring systems for enterprise resource planning (ERP), or planning and forecasting for manufacturing.

"We've seen the international supply chain surviving based on sweat and hard work," Enslow adds, "but the limits of spreadsheets have really begun to show."

Skewed budget priorities aren't the only obstacle to building global supply chains. In the case of IBM, the company was structured in such a way that centralized control over worldwide operations was difficult, if not impossible. "Ten years ago," says Carroll, "we had 30 different supply chains-and 30 chief purchasing officers." Hardly a recipe for efficiency, let alone coherence.

As part of IBM's larger supply chain overhaul, IBM's senior vice president Bob Moffat asked Carroll to come up with "the next step" in the company's quest to become a truly global entity. So Carroll revamped the IBM supply chain to revolve around two axes, one based on function and the other on brand identity.

The functional approach defined IBM's various "pillars of strength" within an end-to-end supply chain. Discrete elements include customer fulfillment, global procurement, global logistics, worldwide in-house manufacturing, worldwide engineering, business transformation and information technology, and the management of supply, demand and inventory across all hardware groups. Each function is overseen by a vice president, with logistics reporting to the chief procurement officer.

Simultaneously, Carroll created three "brand advocates," with individual vice presidents overseeing the entire supply chains related to high-end servers under the zSeries, iSeries and pSeries designations; System x (formerly xSeries) and storage products, and support for retail stores, printer systems and software. Each of those areas, responsible for its own profit-and-loss statement, draws on the various centralized functions to ensure that the company is meeting global customer expectations.

A supply chain designed around the multinational model often will have local design, research and manufacturing operations to support key customers or regions. But there is no "local production" in the new IBM. A plant in Dublin, Ireland, for example, is turning out product for customers worldwide. Likewise, customer-fulfillment centers may be located in various parts of the world, but their reach isn't limited to those areas, or even a particular brand. Which center supports a given customer depends on language, time zones and other factors.

Having gotten its own house in order, IBM is now looking to help other companies embrace a similarly global structure. The biggest obstacle? "Fear of taking the step," says Carroll. Businesses will offer all sorts of arguments about why things can't change. But unless they make a number of diverse, unrelated products, as with companies that have grown through multiple acquisitions, a global approach to supply chain management is often necessary. And that calls for dramatic restructuring throughout the organization.

Cisco Goes Demand-DrivenAnother industry leader that has seen the light, and is using its experience to guide others, is Cisco Systems Inc. It is partnering with logistics consultancy D.W. Morgan to help companies create "demand-driven" supply chains on a global scale. The challenge, says Scott Westlake, Cisco's director of manufacturing industry marketing, lies in crafting consistent processes across multiple companies. Today, no global provider stands alone in serving its end customers, so good communications among supply chain partners is essential.

"The question is how well you respond to changing conditions in demand, supply and forecasting," says Westlake. In fact, he says, agile companies today rely less on traditional forecasting and more on their ability to adjust to deviations from that necessarily inaccurate tool. Issues such as environmental concerns, safety, security and border control make it more vital than ever that inventory and shipment-status information gets to all concerned parties as quickly as possible.

"Getting data is the most important thing in helping companies to compete in the global economy."- Kim Autrey of D.W. Morgan

One beneficiary of Cisco and Morgan's expertise was Adept Technology, a maker of robots for high-tech manufacturing tasks. A typical Adept product might contain up to 300,000 parts, made by suppliers from all over the world. Because the units are so critical to the manufacturing process, they can't be out of commission for any length of time. Adept must be able to respond to orders for parts or service at a moment's notice, 24 hours a day.

The problem for Adept was the rising cost of this high level of customer service. At the same time, the company was having trouble gaining visibility of inventory and shipments globally. So the challenge was twofold: cut costs and improve service. All within a company that employed fewer than 200 people.

Adept ended up outsourcing the management of transportation and logistics to Morgan, which deploys a data network based on Cisco technology and expertise. (Not coincidentally, Cisco's core business consists of making the routers, firewalls and other hardware and software that permit secure communications via the internet.) Cisco's system synchronizes processes among supply chain partners. Its routers allow individuals at Adept manufacturing and service depots, as well as outside vendors, to enter and access real-time data in the Cisco network.

The result is tighter control of Adept's inventory on a global basis. For example, a service depot can link each incoming shipment directly to a particular customer, warranty and service history before it reaches the loading dock. Identifying codes provide real-time visibility into replacement-part locations. And Adept gets a single view of all inventories, whether outbound, inbound, in transit or as work in progress.

Underlying the system is a service-oriented architecture (SOA), the new term for a system that can deal with multiple software applications in a fluid, integrated fashion. Cisco's own flavor of SOA, which it calls Service-Oriented Network Architecture (SONA), optimizes the technology so that it can be applied to users both inside and outside the company. In fact, key status messages, along with alerts when something goes wrong, can be conveyed to wireless videophones and other portable devices so that the information is dispersed in the widest possible way.

"What we found was that getting data was the most important thing in helping companies to compete in the global economy," says Kim Autrey, Morgan's director of marketing and communications. "We create one place for all of the information to be gathered."

Downside of OutsourcingFailure to take such steps can undercut the benefits of moving manufacturing and customer support to offshore locations. A 2005 Aberdeen study, as well as more recent research by the consultancy, uncovered a number of negative side effects of that trend. Having slashed manufacturing costs by putting plants in China or other low-cost countries, companies found themselves saddled with uncertain lead times, hampering their ability to respond to market demands. The higher cost of operating more complex supply chains, especially those related to logistics, was negating many of the promised savings that motivated the move in the first place. Says Enslow: "The greatest category of budget overruns when sourcing from China is transportation." Inadequate systems and processes can also take a big chunk out of profits.

In response, companies are looking to get a better handle on total supply chain costs. Such calculations must include, not just the savings from cheaper manufacturing, but also the cost of transportation, border-crossing issues and even higher levels of inventory, as a buffer against supply interruptions. In addition, the company might be forced to resort to premium transportation, such as airfreight, to fill in gaps in supply.

A well-managed global supply chain shouldn't have to resort to either of those high-priced options, says John Urban, president of Alameda, Calif.-based GT Nexus. His company makes software that helps companies to track costs and product across the supply chain. Better visibility is the real answer, Urban says, adding that information about supply chain disruptions, received early enough, lets companies adjust supply and schedules without adding unacceptable levels of cost. In fact, says Urban, good information makes it possible for companies to reduce inventories, secure in the knowledge that they can meet unexpected demand without expensive safety stock.

Real-time information on landed cost, down to the unit level, is crucial to managing supply chain variability. The data can also be used to track the performance of supply chain partners, both moment-to-moment and over the long term. "Anytime you establish a plan, if you don't measure against it, you're establishing a wish," says Urban.

Companies shouldn't underestimate the challenge of forging a global supply chain. Nathan Pieri, vice president of marketing with Management Dynamics, based in East Rutherford, N.J., likens the task to implementing an ERP backbone. "You're automating all of the flows between you and your suppliers," he says. "You're establishing the capability of connecting outside your four walls."

The problem, says Pieri, is that so few companies have paid much attention to the global aspect of their operations. In the past, it might have accounted for 5 percent of the business. Now, "that strategy has done a 180-degree turn. Everyone's rushing overseas." Order-cycle times can stretch to 90 days, giving companies precious little time to adjust to demand in the real world.

Get a BackboneA company taking the first serious step beyond its borders for sourcing will quickly learn that its putative partners deploy a range of disparate systems. For a vendor like Management Dynamics, that means providing technology that allows for total visibility regardless of the backbone system. In addition, a workable network will allow for the addition of new partners with minimal fuss.

One key to visibility over multiple systems and partners is the establishment of a single management dashboard, which shows what's moving in the supply chain and where. Pre-defined metrics allow for the triggering of alerts when shipments exceed windows of tolerance, says Pieri. The trick lies in selecting those few criteria by which the company wants to manage its inventory, so that it isn't inundated with "error" messages that have little effect on the actual movement of goods.

"Quite frankly, companies are struggling with the whole thing," says John Pulling, senior director of supply chain management with SSA Global Technologies. (Based in Chicago, SSA was recently acquired by Infor Global Solutions.) Often they find themselves stitching together systems to come up with the semblance of a unified network.

SSA's Demand Network Execution System is an event-management tool which sits atop a company's transportation, warehousing and manufacturing systems. It monitors the flow of goods, checks replenishment levels and determines where inventory should be. The technology has an SOA backbone, but integration of all those systems "can still be a challenge," says Pulling. In any case, enough of the tools exist today to get companies close to the goal of a harmonious, integrated supply chain. "You can't wait for nirvana," he says.

Longer supply chains can cause a host of problems, including excess safety stock and uncertainty in a company's sourcing requirements, says Steve Keifer, vice president of industry solutions with GXS Inc. Headquartered in Gaithersburg, MD, his company sells technology that supports business-to-business electronic commerce. It helps customers in the retail, automotive and high-tech sectors to exchange information with logistics service providers, contract manufacturers, product designers and other suppliers of outsourced services.

Merchandisers' lack of complete visibility "continues to astound me," Keifer says, noting the existence of multiple "black holes" of status information. A well-managed supply chain allows companies to avoid the impact of natural disasters, congestion or other unwelcome surprises. But for such a system to work, all information must be centralized in a single portal. GXS's hosted service links factories, carriers, logistics providers and other parties critical to the movement of goods.

Still, the mere existence of a portal doesn't ensure efficient supply chains. Partners must submit information that is both timely and accurate. "We find that 30 to 40 percent of data sent is inaccurate or incomplete," says Keifer. "That's not uncommon at all." Bad data drives up costs, forcing companies to hedge their bets in the form of safety stock.

In fact, the sophistication of information technology is less important than the processes put in place to manage it, says Sean Williams, chief scientist with Burlington, Mass.-based Optiant Inc. He has seen companies succeed with everything from the latest software to daily faxes on inventory positions. The key is a deep understanding of the variability that attends any given supply chain, with respect to product design, sourcing, planning and coordination.

Baseline expectations are the first element to be addressed, says Williams. What does the plan mean? What's required to execute it? For example, if a company orders 5,000 units a month, can the supplier build 10,000 in advance to cut costs? Who is liable for the extra product if it's not needed? And who sets policy for the supplier's supplier? Such questions might not have been asked when a company was manufacturing product internally, Williams says. With global outsourcing in the picture, they become essential.

A similar level of specificity must be achieved with logistics partners. Companies should know how their product will move, based on the needs of the moment. The answers will help to determine the right level of inventory, including the placement of buffer stock at key locations to offset longer supply lines, Williams says.

Visibility Is Key"You can't really get anywhere unless you have visibility across the supply chain," agrees Pete Racine, vice president of supply chain consulting services with Click Commerce, Inc. "If you can't see what's going on, it's very hard to control it." But industries differ in their ability to achieve that goal. The electronics sector, including personal-computer makers, is ahead of the curve, driven by perilously thin margins and high customer demands. But the healthcare business has yet to reach that level of maturity, Racine says.

Despite the call for communications standards, global companies must be able to integrate partners through a variety of means, including Web services, extensible markup language (XML) documents, electronic data interchange and legacy systems. Click Commerce employs an enterprise services bus (ESB) as a backbone, providing a standardized process for the transmission of data from all sources.

One of Click's clients, a major manufacturer of telecommunications equipment, was suffering a huge loss in shareholder value due to high operating costs and lack of customer loyalty. It was sitting on $2bn in inventory, yet had poor customer-service levels. A decision to outsource most logistics and manufacturing led to the need for visibility across the extended supply chain. Click helped the company to integrate all key partners, a move that boosted customer-service levels by 50 percent while reducing inventory value to less than $800m.

Visibility was a prime concern for an importer of fresh produce from Costa Rica and Venezuela. Failure to clear Customs and deliver in a timely fashion would render the product unusable, recalls Steve Hensley, president of Dallas-based Blue Sky Logistics Inc. But sourcing all product closer to home would be prohibitively expensive.

In the end, the company adopted a system that monitored the progress of shipments at each step of the supply chain, from initial order to final delivery. Combining that data with a simple mathematical formula allowed for the creation of a reliable delivery schedule based on where the product was coming from. In the event of a glitch in the supply chain, the company could fill in with product from a closer source.

Big retailers such as Wal-Mart Stores are increasingly demanding that their suppliers put together strategies for sourcing from other countries, with the ability to "turn on a dime" when conditions change, Hensley says.

Global supply chain management is especially challenging for companies made up of multiple business units with separate accounting responsibilities, says Tom McKenna, senior vice president of logistics engineering with Reading, Penn.-based Penske Logistics. The more regions and market segments that a company serves, the harder it is to leverage its combined supply chain capabilities across those different business units.

One solution, says McKenna, is the notion of "center-led procurement." A Penske client has 60 manufacturing plants and four business units in Europe. Each has traditionally been run in a stand-alone fashion. Now the company is trying to consolidate its buying power and control over logistics, despite the desire of each business unit to continue to operate autonomously. Complicating matters is the fact that each division operates on a different IT system; the company wants to install a single ERP package for all. The effort, McKenna says, "is a work in progress."

Entities such as Penske can make the task easier by assuming the role of lead logistics provider on a global basis, assuming that the client is willing. (Penske is the logistics provider of choice for all four of that company's European business units, but only for two of its four North American operations.) But whatever choice a company makes, it must ensure a degree of flexibility. Changes in sourcing, labor, security and costs virtually ensure that a global supply chain will evolve over the years. Whether it's a question of people, process or technology, says McKenna, "you have to be able to adapt."

Global Trade Management: Eight Success Stories

Late last year, Aberdeen Group researched companies that were realizing savings through the transformation of their global logistics operations. It selected eight as "best practice winners" in the areas of global inventory control, transportation spend management, import/export process management, and international logistics outsourcing. As listed in the "Best Practices in International Logistics Report," they were: